Are we saving too much for retirement?

It sounds impossible, but financial planners may be telling us to save far too much

Frugal Americans—assaulted by warnings of a retirement crisis—are spending less and saving more. All well and good, but are financial planners and online savings tools actually telling us to save too much—almost to an excessive point?

What's worse, are they telling us things that may actually derail our retirement income?

Austin Nichols, a senior research associate at the Urban Institute's Program on Retirement Policy, writes in a new research report that the old "rule-of-thumb" of aiming to replace at least 80 percent of pre-retirement income to cover expenses could be exaggerated. When it comes to retirement planning, he argues, pre-retirees shouldn't concentrate on the amount of income they can replace, but should instead focus on the amount of consumption they can handle once they reach retirement.

In other words, it's not how much you're saving, but how much you're spending that's going to determine how fast you'll run short of money in retirement.

"Americans are not necessarily saving too little for retirement, and the traditional rule of thumb that one should aim to replace 80 percent of pre-retirement income is clearly misguided," Nichols writes. "Instead, one should aim to save enough so that spending does not need to drop precipitously in retirement."

Why might 80 percent be too high? Nichols says the traditional figure may be more misleading for older savers who, in the shorter run-up to their target retirement date, would have to begin a more aggressive savings pattern to get to that level of income replacement. They don't realize they're putting away too much and aren't focusing on leveling out their spending before and after retirement.

Nichols explains, "If one aimed to replace four-fifths of pre-retirement income in retirement and saved two-thirds of income for 20 years to hit that target, for example, spending would more than double at the moment of retirement, which is clearly not optimal. Who wants to double their spending the day they retire? Target spending in retirement should be lower. Yet advice to pursue this suboptimal oversaving strategy is ubiquitous."

"There is abundant advice about how much to save, much of which urges individuals to aim to replace 80 percent of their preretirement pretax income," Nichols continues. "However, those who wait to save for retirement and follow this rule of thumb would save far too much of their gross income, and many would see their annual resources spike upward when they retire. The constant savings rate required to equalize consumption across the preretirement and postretirement years generally is much lower than the 80 percent rule."

Yes, the recession has left many people approaching retirement with far less than they had anticipated and so they'll need to work longer to make up for it. And yes, Social Security benefits will almost certainly be lower in the future for workers. But, "it would be a mistake for current workers to overreact."

The parent company of United Airlines and Continental Airlines said Wednesday that Continental has reached a labor agreement with representatives of some 7,200 non-union employees who work as reservation agents and in other passenger-service roles.